1. Borrow for long-term goals, not short-term pleasures. Try to take out loans only for purchases that will pay long-term returns, like a house, a home remodeling, a college education, or a car, and not for a better wardrobe or a European vacation. One useful rule of thumb: Never take out a loan that will last longer than what you're buying.
2. Apply for the shortest term loan you can afford. Stretch to make the larger monthly payments that come with shortening a loan's term. By doing so, you'll pay less in interest over the life of the loan. Consider your choices for a $20,000 car loan at 9.5%. If you select a five-year loan, you'd pay just $420 a month but spend $5,200 on interest, bringing your total payments to $25,200. Opt for a three-year term, however, and although your monthly payments would rise to about $640, you'd pay just $3,060 in total interest or $23,060 in total over three years. By biting the bullet and taking on the higher monthly payment, you could save $2,140 in interest costs.
3. Pay as much as you can up front. When you finance a purchase, put down as much as you can, and don't go by lenders' guidelines. Double or triple the minimum down payment the lender demands, if possible. If you can make one or two large payments during the loan's first months without incurring a prepayment penalty, do it. This strategy, known as front-loading, can shave months off your loan.
4. Consolidate high rate credit card debts with a lower rate card or home equity loan. If you carry a balance on several credit cards, you may be able to merge them into one balance on a single low rate card. Many credit cards will send you a balance transfer form or so-called convenience checks that you can use to pay off your balances on other cards. Be sure to ask your issuer to describe its terms on a balance transfer first: some treat transfers as cash advances and thus may impose a transaction fee of up to $10 or charge higher interest on the amount you transfer.
If your debt is large enough and the rate is low enough, however, you can still come out ahead. For example, if you transfer your $5,000 balance from a card that charges 18% interest to a card that charges 13% interest, you could save $125 in interest over just the first six months. Another option is to scoop up debts into a home-equity loan, assuming you're a homeowner. Say you're in the 28% federal income tax bracket and transfer $10,000 from credit cards that charge 18% interest into a 9% home-equity loan. You'll save about $2,700 in interest payments over five years, plus another $750 or so in federal income taxes, since the home-equity interest is tax-deductible.
5. Shop around for the best borrowing deal. The most recent issue of money or perhaps your local newspaper are good places to start. You can find lists of the best credit cards, as well as the best deals on mortgages, home-equity loans, and car loans in your area. Be sure to call at least half a dozen lenders before taking out a new loan. Two options you should always check out: credit unions and the bank where you have your savings. On average, credit unions offer loan rates that are one to 2.5 percentage points lower than those available at banks and S&Ls.; What's more, they have become increasingly flexible about their membership. Also, ask a loan officer where you keep your checking and savings accounts whether depositors get special breaks on loans. You can sometimes get a quarter-point discount on the interest rate by having your payments deducted automatically from your account each month.
6. Review your credit report before applying for a loan. Credit reporting agencies keep data on your debt payment history and the amount of credit you already have. They then sell this information to lenders, merchants, and other credit issuers, who use it to target you as a potential borrower and to decide whether to grant you more credit.
7. Negotiate rates and fees. Though lenders don't like to admit it, with a little arm twisting many today will cut their credit card interest rates and fees, as well as lower costs on all kinds of loans. You can score potential savings simply by asking for a better deal and, if necessary, threatening to take your business elsewhere. In 1994 a team of 28 money reporters (who didn't identify themselves as such) with MasterCards, Visas, or Discover cards called their card's issuing bank and asked for better terms. Result: Of the 88 banks called (some reporters owned more than one card and called more than one bank), 84 waived their annual fee, lowered their interest rate, or did both.
As an example of the difference that dialing for dollars can make, Signet Bank responded to one reporter's call by ditching the $18 fee on her MasterCard and lowering her 19.8% interest rate to a reasonable 13.9%. You can also save more money by asking lenders for lower interest rates and fees on car loans, home equity loans, and mortgages. Most banks have an official rate for each type of loan they make. But if you are an existing customer or have a good credit rating, it's not difficult to convince the bank to lend to you at a lower rate.
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2. Apply for the shortest term loan you can afford. Stretch to make the larger monthly payments that come with shortening a loan's term. By doing so, you'll pay less in interest over the life of the loan. Consider your choices for a $20,000 car loan at 9.5%. If you select a five-year loan, you'd pay just $420 a month but spend $5,200 on interest, bringing your total payments to $25,200. Opt for a three-year term, however, and although your monthly payments would rise to about $640, you'd pay just $3,060 in total interest or $23,060 in total over three years. By biting the bullet and taking on the higher monthly payment, you could save $2,140 in interest costs.
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3. Pay as much as you can up front. When you finance a purchase, put down as much as you can, and don't go by lenders' guidelines. Double or triple the minimum down payment the lender demands, if possible. If you can make one or two large payments during the loan's first months without incurring a prepayment penalty, do it. This strategy, known as front-loading, can shave months off your loan.
4. Consolidate high rate credit card debts with a lower rate card or home equity loan. If you carry a balance on several credit cards, you may be able to merge them into one balance on a single low rate card. Many credit cards will send you a balance transfer form or so-called convenience checks that you can use to pay off your balances on other cards. Be sure to ask your issuer to describe its terms on a balance transfer first: some treat transfers as cash advances and thus may impose a transaction fee of up to $10 or charge higher interest on the amount you transfer.
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If your debt is large enough and the rate is low enough, however, you can still come out ahead. For example, if you transfer your $5,000 balance from a card that charges 18% interest to a card that charges 13% interest, you could save $125 in interest over just the first six months. Another option is to scoop up debts into a home-equity loan, assuming you're a homeowner. Say you're in the 28% federal income tax bracket and transfer $10,000 from credit cards that charge 18% interest into a 9% home-equity loan. You'll save about $2,700 in interest payments over five years, plus another $750 or so in federal income taxes, since the home-equity interest is tax-deductible.
5. Shop around for the best borrowing deal. The most recent issue of money or perhaps your local newspaper are good places to start. You can find lists of the best credit cards, as well as the best deals on mortgages, home-equity loans, and car loans in your area. Be sure to call at least half a dozen lenders before taking out a new loan. Two options you should always check out: credit unions and the bank where you have your savings. On average, credit unions offer loan rates that are one to 2.5 percentage points lower than those available at banks and S&Ls.; What's more, they have become increasingly flexible about their membership. Also, ask a loan officer where you keep your checking and savings accounts whether depositors get special breaks on loans. You can sometimes get a quarter-point discount on the interest rate by having your payments deducted automatically from your account each month.
6. Review your credit report before applying for a loan. Credit reporting agencies keep data on your debt payment history and the amount of credit you already have. They then sell this information to lenders, merchants, and other credit issuers, who use it to target you as a potential borrower and to decide whether to grant you more credit.
7. Negotiate rates and fees. Though lenders don't like to admit it, with a little arm twisting many today will cut their credit card interest rates and fees, as well as lower costs on all kinds of loans. You can score potential savings simply by asking for a better deal and, if necessary, threatening to take your business elsewhere. In 1994 a team of 28 money reporters (who didn't identify themselves as such) with MasterCards, Visas, or Discover cards called their card's issuing bank and asked for better terms. Result: Of the 88 banks called (some reporters owned more than one card and called more than one bank), 84 waived their annual fee, lowered their interest rate, or did both.
As an example of the difference that dialing for dollars can make, Signet Bank responded to one reporter's call by ditching the $18 fee on her MasterCard and lowering her 19.8% interest rate to a reasonable 13.9%. You can also save more money by asking lenders for lower interest rates and fees on car loans, home equity loans, and mortgages. Most banks have an official rate for each type of loan they make. But if you are an existing customer or have a good credit rating, it's not difficult to convince the bank to lend to you at a lower rate.
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